January 15, 2014 / 2:40 PM / 4 years ago

TREASURIES-Yields rise on higher inflation, rate hike speculation

* Yields rise as inflation expectations pick up
    * Intermediate-dated notes weaken on rate hike speculation
    * Fed to buy $4 bln-$5 bln notes due 2018 and 2019

    By Karen Brettell
    NEW YORK, Jan 15 (Reuters) - U.S. Treasuries yields rose on
Wednesday after U.S. producer prices recorded their largest
increase in six months in December, raising expectations that
inflation may start picking up and potentially bring forward the
timeline in which the Federal Reserve will start raising rates.
    The Labor Department said on Wednesday its seasonally
adjusted producer price index rose 0.4 percent last month, the
biggest rise since June, after slipping 0.1 percent in November.
The rise in prices received by the nation's farms, factories and
refineries ended two straight months of declines and matched
economists' expectations. 
    "There were some early hints of inflationary pressures,
recently there has been a sense that inflation might have
bottomed," said Boris Rjavinski, an interest rate strategist at
UBS in Stamford, Connecticut.
    Intermediate-dated debt, which is the most sensitive to Fed
interest rate policy, was among the worst performers on
Wednesday as traders and investors try to evaluate when the Fed
is likely to increase rates from rock bottom levels.
    Some traders think the Fed could move in mid-2015 while
others see a hike as unlikely until at least 2016.
    "The selloff is led by relatively shorter-term maturities.
That kind of reaction means it's not about tapering, but if
inflationary pressures are building what does that mean for the
timing of the first hike from the Fed," Rjavinski said.
    Five-year notes were last down 6/32 in price to
yield 1.691 percent, up from 1.647 percent late on Tuesday. The
notes have given back more than half of their gains made on
Friday and Monday, after a weaker-than-expected employment
report for December sparked a strong short-covering rally.
    Benchmark 10-year notes were last down 8/32 in
price to yield 2.906 percent, up from 2.869 percent late on
Tuesday. Thirty-year bonds fell 14/32 in price to
yield 3.830 percent, up from 3.800 percent.
    The Fed will purchase between $4 billion and $5 billion in
notes due 2018 and 2019 on Wednesday as part of its ongoing
purchase program.
    Chicago Fed President Charles Evans and Atlanta Fed
President Dennis Lockhart are both due to speak later on
    The U.S. central bank will also release its Beige Book
report on Wednesday, a collection of anecdotes from the central
bank's business contacts across the nation, which will be
watched for signs of the strength of the economic recovery.
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